Long back at pharma news to Oct 27

Last week’s news was largely dominated by financial results, with among many others, Swiss pharma giant Novartis pleasing investors, while Celgene and Gilead Sciences disappointed. Also attracting a good deal of attention was MacroGenics lucrative deal with Incyte for cancer drug candidate MGA012, and Novartis gaining breakthrough status for its melanoma drug combination Tafinlar+Mekinist.

Novartis 3rd-qtr: strong signals but wait for better entry point

On October 24, Novartis reported better-than-expected third-quarter 2017 results fueled by a solid performance from the key growth drivers in the Pharmaceutical Division and some encouraging profitability improvement for Alcon and Sandoz, commented “Health Blogger” on Seeking Alpha.

The main takeaways from this quarter have been:

•         Cosentyx sales were $556 million, in line with consensus, driven by a strong performance in PsA and AS, which compensates some pressure in the psoriasis space.” I'm worrying that the situation will further deteriorate for this drug over the coming quarters because the psoriasis market is likely to become increasingly crowded over the next couple of years,” the blogger noted.
• Entresto sales in heart failure were $128 million, 8% below consensus, which puts at risk the guidance for this drug of $500 million of sales by year-end. He still believes that the expectations for this drug need to be rebased down because the growth trajectory has been slower than expected.
• Gilenya sales were $801 million, 3% below consensus, pressured by the competition from Ocrevus in multiple sclerosis.
• Lucentis sales were $481 million, 5% higher than consensus, driven by some stabilization of Novartis's market share in the two key indications - wet AMD and DME, which bodes well for the expected launch of RTH258 in 2018.
• Lastly, related to the other two divisions, Novartis reported strong results for Alcon and for Sandoz.
• Alcon sales were $1.52 billion, 3% above consensus, driven by a strong performance in all segments (surgical, ioL and Vision Care). In addition to that, the company also reported a strong improvement in profitability for this division at 15.6%, which is 200 bps better than consensus and 100 bps higher than Q3 2016. Novartis also provides an update about the strategic review for this division, looking for a Capital Markets Exit for the business in 1H 2019.
• Sandoz sales were $2.58 billion, 3% above consensus, driven by a good volume dynamics which has compensated the pricing erosion in US. In addition to that, the company also reported a strong improvement in profitability for this division at 22.4%, which is 220 bps better than consensus and 130 bps higher than Q3 2016.

The key investor takeaway is that the corporate signals have been strong, with some positive developments related to Pharmaceutical and Alcon Divisions. However, given that the stock has re-rated from 15.5x to 16.4 NTM P/E, I would wait for a better re-entry point.

Celgene: sell-off is overdone

Celgene's recent decline started a few weeks back when the company announced that it would be stopping trials of its drug mongersen for Crohn’s disease. Celgene spent $710 million back in 2014 to acquire the company that originally began developing mongersen and it seems like this purchase might end up being a wash, noted Nicholas Ward on Seeking Alpha.

Negative guidance during last week’s earnings report sent the stock down below $100 as management slightly lowered the company's 2020 targets, for its "Total Oncology" and "Total I&I" segments, significantly. Otezla struggled a bit in the recent quarter and this negative I&I guidance seems to point towards the fact that this trend might continue. This isn't good. The company did increase its "Total Hematology" sales outlook, but the cuts from Oncology and I&I were big enough to drop the overall sales outlook. Not only was the 2020 sales outlook lowered, but the adjusted EPS guidance was negative as well.

Now, with all of this in mind, it's still worth noting that if Celgene can hit these lowered guidance figures, at $96/share, the stock is only trading for ~7.7x 2020 EPS guidance, says Mr Ward. Obviously we're a long way from 2020 and a lot needs to go right for the company between now and then for it to grow its non-GAAP EPS from 2017's estimates of $7.30-$7.35 to ~$12.50; however, assuming management is able to execute, the $96 share price available to investors today would look like a major bargain a few years down the road. This is a risk that I'm willing to take with a small percentage of my portfolio, though I understand why others might not put much weight behind Celgene’s 2020 estimates.

Reality check for Gilead stock

For what it’s worth (which isn’t much), Gilead Sciences topped last quarter’s revenue outlook, doing $6.5 billion of business versus expectations of only $6.33 billion, noted James Brumely on InvestorsPlace on Friday. Earnings of $2.27-per-share topped outlooks for only $2.03-per-share.

While sales were off a little more than 13% thanks to a waning hepatitis C drug business, investors more or less knew that was in the cards. Still, there’s just something about seeing it in print that can spook a stock. It’s the company’s deteriorating hepatitis C sales, in fact, that keep Gilead moving all over the map.

The core question that’s driving traders mad: does GILD stock’s current price reflect the company’s struggling hepatitis C portfolio. Some feel the answer is yes, while others feel the answer is no. Many of those traders, however, don’t know, and/or they’re changing their mind on a pretty regular basis, hence all the volatility. See, the company’s hepatitis treatments Sovaldi, Harvoni, Epclusa and Vosevi are perceived as Gilead Sciences’ flagship products. If they’re doing well, so is Gilead. If they’re doing poorly, again, so is Gilead.

Adding his comment, blogger “DoctoRx” said on Seeking Alpha that Gilead had a nominal "beat" versus expectations, but what matters more is not a little extra income one particular quarter, but what the future stream of income that's coming will be. In that regard, Gilead's $2.06 of EPS (using GAAP), down from $2.49 was OK for a $77 stock going into earnings if it was the bottom. And, Gilead guided marginally up for Q4, but only marginally and not definitively.

However, what sent the stock down once again after analysts had a chance to digest guidance was that HCV meds are guided to a midpoint of $1.1 billion in Q4, down from $2.2 billion in Q3 and $3.3 billion in Q3 last year. Worse, as I do the arithmetic, the range of uncertainty for HCV sales in the current quarter includes a number below $900 million.

Worse yet, the company adamantly stood on ceremony and refused to provide any guidance for next year. It did say, however, that contracting is not complete in the US for next year. This suggests to me that US sales are going to drop sharply. What is worse about this forecast is that per slide 34 on its earnings slide presentition, HCV revenues of $2.2 billion in Q3 included nearly $800 million from Europe and other areas, principally Japan.

All eyes on Incyte and Infinity

A deal Incyte struck Wednesday with MacroGenics, handing across $150 million up front to get access to the latter’s anti-PD-1 MAb MGA012, immediately promoted a clinical trial of this little-known asset up the list of important readouts at the upcoming SITC meeting, says EP Vantage, the editorial arm of EP Vantage.

This ramps up the pressure on Incyte, which will also be subjected to scrutiny when Bristol-Myers Squibb reports data on BMS-986205, an IDO inhibitor that rivals Incyte’s epacadostat, in an SITC late-breaker. Among other recently revealed late-breakers the spotlight will also fall on Infinity, an early beneficiary of SITC-related investor exuberance

The BMS-986205 study had been rumored earlier to have made it into the SITC (Society for the Immunotherapy of Cancer) late-breakers. It is seen as important because, according to Evercore ISI’s Umer Raffat, this compound causes a structural change in the IDO enzyme’s binding site, rendering its effect irreversible.

In contrast, Incyte’s epacadostat appears simply to inhibit the interaction of IDO with its substrate, and this reversible interaction might be less potent than an irreversible one. The title of the Bristol late-breaker promises to reveal preliminary antitumor and immunomodulatory activity of the once-daily IDO inhibitor – epacadostat is twice-daily – combined with Opdivo.

Incyte’s newly-acquired anti-PD-1, MGA012, features in standard SITC presentations, in abstracts detailing a clinical trial and preclinical characterisation; Leerink has for some time seen the monotherapy clinical trial as an important MacroGenics catalyst – though it is currently listed only in SITC’s “trials in progress” category – and now it will become one for Incyte.

Interestingly, Incyte already has an anti-PD-1, SHR-1210, now known as INCSHR1210, licensed from Jianngsu Hengrui Medicine two years ago, so yesterday’s MacroGenics deal suggests that INCSHR1210 is not progressing well. It is not clear what impact the group thinks it can make given the dozens of PD-(L)1 agents already in development, but its $150 million up front suggests that a decent in-house asset is key to its combo strategy.

Readers who have done their due diligence and are interested in the story should initiate a pilot position in the near term, noted Jonathan Faison on Seeking Alpha. More conservative investors could wait to add to their position after (if) the stock price settles back in the following weeks.

The company appears to have many irons in the fire, lessening downside risk if one or more experience setbacks. Dilution in the near to medium term does not appear to be a risk and the company might seek partnerships for additional assets as well. Disappointing data in both early and late-stage studies involving lead candidate margetuximab or other assets (such as MGA012 or flotetuzumab) is also a concern. Intense competition with several targets (such as HER2 and PD-1) could make it difficult for the company`s assets to gain much market share even if approved, noted Mr Faison.

Novartis combination is a breakthrough in advanced melanoma

Last week, Novartis received Breakthrough Therapy designation for Tafinlar+Mekinist (dabrafenib-trametinib) in the management of stage III, BRAF-mutant melanoma. This designation was based on results of the COMBI-AD study, which showed a significant improvement in progression-free survival when the drug cocktail was used as adjuvant therapy post resection, noted Dr Zach Hartman on Seeking Alpha

Looking forward, De Hartman said, right now, adjuvant therapy is not known to be a highly effective treatment strategy in the setting of melanoma, due largely to a general lack of effective options in the space. However, the COMBI-AD study shows a clear role for RAF and MEK inhibitors here. Preventing recurrence can go a long way toward improving overall outcomes for patients, especially if you can prevent the eventual metastasis that can be lethal in these patients.

Novartis is in a race against its Swiss rival Roche to get its Tafinlar and Mekinist combo approved before Roche gets its Cotellic-Zelboraf combo in a cocktail with PD-L1 Tecentriq drug as a first-line treatment for BRAF V600 melanoma approved. Roche hopes to file that triple-combo, which is currently in a Phase III trial, sometime in 2019.